Interviewing a Broker

Oscar Wilde's assessment of stockbrokers stems from the many decades when the brokerage business was less than civilized, a mysterious, dangerous place that most individuals didn't understand. It was the Wild West, where the good guys and bad guys were hard to tell apart, but impossible to avoid because they were the only ones with access to both information and data and the markets themselves.

In addition, those brokers were, until recent years, always paid on a commission basis, meaning that many encouraged selling and trading in order to generate their own income at the customer's expense.

It made people wonder whether they were called "broker" because that's what you were once you had dealt with them.

The brokerage industry has, in many ways, reinvented itself over the last 10 to 15 years, though there are still plenty of pockets where the Wild West mentality lives on.

The metamorphosis of brokers -- guys who traditionally sold stocks, bonds, and mutual funds -- into financial advisors, who go beyond making transactions and recommending investments to oversee the entire financial picture, has largely been created by public demand.

It has also generated a tremendous amount of public confusion. Between the different regulatory standards and documents for brokers versus financial planners, the range of names that loosely fall under the terms "broker" or "financial planner" or "money manager," there are many times when consumers believe they are getting one type of help, and instead are talking to someone who plays a different role.

It is entirely possible for you to think you are hiring a broker, but to wind up with someone who acts more like a financial planner or money manager, or vice versa. As this book goes to press, the federal government is wrestling with these inconsistencies and trying to decide if it will require broker-dealers who "provide advice" to work under the same standards as investment advisors. If it does, then a brokerage account executive who gives investment advice would have the same fiduciary, put-the-client's interests-first standard that an investment advisor must currently live up to.

That doesn't put an end to the "suitability standard" that brokers have been living with, it just leaves that in place for the guys who sell products and investments, rather than advice.

Of course, plenty of people who have worked with a stockbroker feel like they have been getting advice, even if that's not what they have actually been paying for. It's unlikely that part of the confusion will end.

The reasons for this evolution have to do with changes in the rest of the financial services industry, but they boil down to brokers' efforts to survive amid the financial planners who offer complete service and the do-it-yourself crowd that buys stocks and funds without help from anyone.

While the changes in the brokerage business were supposed to make things easier for consumers, they made vetting a broker more complex. In fact, if you are meeting with a broker, but looking for someone to provide investment advice and function as a financial planner, you may need to ask the interview questions that apply to both specialties in order to feel comfortable with your decision.

As with all financial advisors, the key to finding a good broker is having a good idea of what you want, and knowing how to look for it.

Can I Do This Myself?

No one actually "needs" a broker. The average individual investor can take care of a lifetime's worth of investment needs by purchasing no-load mutual funds and stocks -- and the number of stocks that are being made available to the public on a commission-free, no-broker basis has grown to the point that you can assemble a nice portfolio that way, too. Treasury bonds also are available on a no-commission basis, direct from the government.

Likewise, anyone working with a financial planner, investment advisor, money manager, or the trust department of a bank could find a broker's services redundant and unnecessary.

But if you intend to invest in municipal or corporate bonds or want stocks beyond the universe of the few hundred that currently sell shares directly to the public -- or you simply want a specialist to suggest moves and implement strategy -- you will need a broker in there somewhere, either the full-service variety, a discount broker, or an online service (there are details on picking an online broker later in this chapter).

Some people work with several brokers, each specializing in meeting a specific need or handling a particular type of transaction, such as a fixed-income specialist selling bonds and an equity specialist recommending stocks.

By Chuck Jaffe

Chuck Jaffe is a senior columnist and host of two weekly podcasts at MarkWatch. He has also been a guest speaker on several television and radio shows.